Rising Electricity Prices and Value Delivery
EcoAlign, a marketing agency for utility and vendor clients, pursues the so-called "green gap," or the gap between consumers' stated intentions and their actions.
One example: 80 to 90 percent of people polled favor energy efficiency, but the percent of people who do something about it is in the low teens.
"The gap is most glaring when it doesn't cost anything to act," Jamie Wimberly, president of EcoAlign, told me this week.
Wimberly had caught my ear when he served on a panel at the Demand Response Coordinating Committee's National Town Hall meeting at the end of June. ("Shakespeare and Demand Response" covered another aspect of the meeting.)
He said then that selling the smart grid to consumers as a cost-saving idea is "a loser."
"Those expectations aren't going to be met," he added.
In other words, inevitable price increases will outstrip our ability to manage our energy use for cost savings, if the present is our baseline.
Why an inevitable rise in electricity prices?
Wimberly's pragmatic answer was not - as one hears with depressing frequency - because selfish, socialist environmentalists are at work while you sleep, conspiring with Al Gore to rob us of our livelihoods.
"Prices are rising because many utilities haven't gone through a rate case in years and now almost everyone is," Wimberly said.
"In our estimation there is definitely a growing constraint on the resource base," he continued. "And we make the general assumption that the infrastructure - whether that be the wires or the resources - are either very old or they're just not configured to meet modern demand. So, a lot of that has to be upgraded or replaced. There's a multi-billion-dollar price tag to be paid over the next 10, 15 years, to replace aging infrastructure."
"'Fuel adjustment clauses' are going to go up again, because quite frankly, due to macroeconomic conditions, we're in a distorted price period," Wimberly added.
Environmental and climate change concerns indeed add costs that haven't been factored in yet, just as smart grid technology costs must be paid, Wimberly acknowledged. An "outlier": the impact on demand by electric vehicles, say, a decade from now.
"Remember, pricing in this industry is on the margin, so it doesn't take that much to send prices up," Wimberly said.
Even if you take potential carbon pricing in energy legislation being considered by Congress this summer out of the equation, you're still looking at substantial price increases.
"I can see the price of electricity going up significantly because, quite frankly, it's been cheap, due to regulation and because people haven't been investing," Wimberly added. "The industry's assets are fully depreciated."
Where does that leave us?
Wimberly's thesis is that utilities will work with "New Providers" - branded retailers with experience in value-added services (i.e., "the Googles") - to add value to a commodity business. (He shared insights gained from EcoAlign's just-published study, "Viable Utility Business Models in a New Provider Environment," but we'll treat those in tomorrow's column.)
"When consumers see prices increase, they want more value," Wimberly explained. "And 'energy management,' in and of itself, while needed, is not going to fulfill that value expectation. A consumer could be offered a suite of really nice energy management tools and their bill is still going to go up."
At some point, the "New Providers" will link the commodity of electricity to energy management and a wide array of home-related services, in Wimberly's view. Prominent brands will offer a comprehensive suite of services, not just energy, but security, telecommunications and entertainment, he said.
"That suite of services will be tied to a lifestyle or even a visible manifestation of status," he added. "That's where value is. As I said at the DRCC meeting, where do we create a sense of value in a commodity business? We do that by moving along this continuum."
This strikes me as a case where thinking through the morphing business case could lead to strategic infrastructure investment - not the other way around. Obviously, many of our readers feel the same way.
That leaves my conversation with Wimberly on morphing utility business models for tomorrow. See you here then.
Phil Carson
Editor-in-chief
Intelligent Utility Daily
pcarson@energycentral.com
303-228-4757
Comments
1,2,3 What Are We Doing This For?
I think Mr. Wimberly is on to something. The Washington, DC dynamic pricing pilot indicated average savings of $44/year, which may be worth pursuing for low income folks but doesn't do anything for most electricity users. Rates are going to increase for all of the reasons he cites. Selling conservation and the Smart Grid on cost savings is the quickest way to wreck your credibility, which is exactly what happened to proponents of electric "deregulation".
I think a better argument goes something like this: The public wants the benefits of electricity without any its environmental and viewshed impacts. If we want to have our cake and eat it too, we're going to have to think differently about how we use electricity. It's highly hypocritical to clamor for cheap, reliable electric service so long as our distant neighbors are the ones who have to put up with the powerplants and wires.